Tuesday, April 3, 2007

Stylized Facts on Latin America’s Economic Growth – part 2

Latin America’s growth has lagged that of other regions of the world, even after the adoption of “Washington Consensus” policies. Among the explanations Zettlemeyer highlights in a recent paper are:

1. Monopolistic industries/absence of competition in state-owned enterprises led to low productivity. Privatization - especially of utilities - and trade liberalization were intended to increase competition and hence foster productivity growth. But the evidence to date suggests privatization does not increase growth, in part because privatization did not necessarily increase competition or end monopolistic industrial structures. In fact, privatization and external liberalization failed to eliminate bureaucratic red tape or induce more flexible labor markets. (see Djankov, Zettlemeyer)
2. Weak property rights - and the paucity of collateral - inhibit the development of local credit markets, limiting financial development and ultimately growth (see Tommasi). On the other hand, weak Chinese property rights (notably on land) haven’t inhibited Chinese growth. (see Rosenblatt)
3. Financial shocks. Capital account liberalization initially seems to have led to greater exposure to external financial shocks – without necessarily leading to rapid financial modernization. Capital flows have been pro-cyclical and, at least so far, have tended to augment boom-bust cycles rather than help smooth consumption in the face of shocks. Rather than reducing macroeconomic volatility, capital account liberalization may have increased it. (see Roja-Suarez)
4. Doing too much yet not enough. Big bang type of reforms – along the lines of the “Washington Consensus” – changed a host of policies without necessarily addressing the binding constraints limiting growth. Conversely, more modest reforms that left many potential distortions in place often have been enough to spur growth. (For example, China’s growth acceleration came without ending state dominance of the financial sector.) Targeted reforms that addressed country-specific constraints might yield better results. (see Hausmann, Rodrik and Velasco)

Zettlemeyer leaves aside three other explanations for poor growth performance in Latin countries: 1) Latin countries display low levels of savings, which translates – absent sustained external capital flows – to low levels of investment; 2) high levels of financial dollarization generated significant balance sheet vulnerabilities in the banking system and increased Latin countries’ exposure to exogenous shocks (see Krueger and Levy-Yeyati); and 3) Most reforms implemented by Latin countriesmost reforms have been related to achieving macro stability; the harder structural reform that would increase potential and actual growth have been lagging in the region; so the problem is not the Washington Consensus policies but the fact that they have not been systematically implemented. (see Fraga)

Conclusion
Most reforms implemented by Latin countries have been related to achieving macro stability; the harder structural reform that would increase potential and actual growth have been lagging in the region; so the problem is not the Washington Consensus policies but the fact that they have not been systematically implemented. All in all, Latin America needs to break the spells of short-spanned growth periods and create the appropriate internal conditions for long cycles of growth.

After the “Washington Consensus” set of reforms failed to deliver all that was promised, no consensus on a single set of measures to generate sustained growth everywhere has been created – but that itself may be a sign of progress.

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